EURUSD Makes Ground Despite Brexit Concerns

 The Euro has recovered most of the ground it lost against the US dollar after the UK referendum voted to leave the EU on June 23rd. The price of EURUSD touched a low on June 24th of 1.09090, a level which was last seen in March, since then it has risen 2.53% to testyesterday’s high at 1.11853.

There had been extensive concern about the possibility of other European countries suffering a contagious effect of the positive Brexit vote. Although the Euro suffered the day after the vote, the market sentiment on the strength of the common currency has since changed a lot.

Dovish comments from members of the Federal Reserve have also helped put further interest rate hikes in the US on hold, at least for now. This has made the Euro more attractive again against the green-back. There will be a scheduled ECB monetary policy meeting at 12:45pm tomorrow. The ECB president will then hold a press conference at 1:30 pm and comments made could spark an increase in volatility. Mentions of more quantitative easing should send the Euro lower.

However, a string of not so bullish economic data from the US, over the week, has helped maintain the momentum to the upside. The Gross Domestic Price Index and Personal Consumption Expenditure Prices (both measures of inflation pressure) were released lower than expected. This meant little evidence for the Federal Reserve that interest rates need to be hiked anytime soon. This Friday at 12:30 pm we will get the release of Non-Farm Payrolls, with an expected figure of 180k new jobs. The market will want to something close to that figure to maintain the current levels of the US dollar.

The poor data from the US has been accompanied by not as bad as expected data from Europe, most notably the Consumer Price Index YoY, which was expect flat, at 0.0%, and was released at 0.1%. Last month’s figure had been a negative 0.1% 

If you think that the volatility of the EURUSD will increase over the next week then you maybuy a Straddle strategy, which consists of simultaneously buying a Call and a Put option with the same strike, expiry and amount.

The screen shot below shows a Buy Straddle strategy with a 1.11539 strike, 7 day expiry, and for €10,000 would cost $118.63, which would be the maximum risk.

This screenshot shows the profit and loss profile of the above Buy Straddle strategy, just click the scenarios button.

On the other hand, if you think that volatility for EURUSD will decline or stay flat over the next week then you maysell a Straddle strategy, which consists of simultaneously selling a Call and a Put option with the same strike, expiry and amount.

The screenshot below shows a Sell Straddle strategy with 1.11596 strike, 7 day expiry, and for €10,000 would generate $97.99, with a total risk of $321.19.

This screenshot shows the profit and loss profile of the above Sell Straddle strategy.